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LONDON (Reuters) - Gilt traders will be burning the midnight oil on election night when the gilt futures market opens for business overnight for the first time since the derivatives contract was launched in 1982.

However, they may struggle to stay awake because most pension funds and retail investors are likely to be reluctant to enter any big positions until later on Friday morning, when the cash market opens and the election outcome is clearer.

"It's difficult to see why anyone would want to take risk positions at 2 a.m. when it won't be clear what the result will be. Most of the investors I've spoken to don't want to take any risks," said Francis Diamond, strategist at JP Morgan.

"Any volumes you do get will be small and will probably be local traders on Liffe speculating and having a bet."

Futures exchange NYSE Liffe will open trading in gilt futures, short sterling interest rate futures and FTSE-100 futures from 0000 GMT on Friday, May 7, allowing investors to hedge their investments as the election results trickle in.

Thursday's vote is the closest-run in decades and opinion polls are still pointing to a hung parliament, where neither the of two main parties wins an overall majority.

Markets have slowly come round to the view that such an outcome need not spell fiscal disaster for Britain as all parties are committed to cutting government borrowing, but an unexpected swing towards one party could cause some volatility.

Most of the 17 Gilt Edged Market Makers will have a few staff in overnight to trade gilt futures, but cash gilts will not be trading and most analysts reckon volumes will be thin.

"It'll just be market makers trading with each other," said Neal Watts, a gilt sales strategist at interdealer broker ICAP. "I'm not sure how much other flow will go through."

RANGEBOUND

Although gilt futures have benefited recently from safe-haven buying in response to the fiscal crisis in Greece, they have traded in a range between 113.52 and 115.62 for the last couple of months as investors sit tight for the poll.

The yield on 10-year gilts, at around 3.83 percent, is already at its lowest this year and Diamond sees little scope for it to fall much further even if investors view the election outcome positively.

"If there was a landslide Conservative victory, the most you'd get is a 10-15 basis point rally," he noted.

That's a far cry from April 1992, when the Conservative Party led by John Major confounded pre-election polls by winning a fourth term in office, sparking a gilt rally that saw 10-year yields dive almost 80 basis points.

The Bank of England, which issued UK government bonds before the creation of the Debt Management Office in 1997, capitalised on the rally by selling 1.6 billion pounds of gilts during the night.

LIFFE introduced overnight trading for European derivatives only three years ago so this is the first time the technology has been in place to allow gilt futures to be traded on a UK election night, and LIFFE said its decision to trade overnight was in response to client demand.

The DMO will not be selling gilts on Thursday night, however, as it is obliged to follow a fixed auction schedule, giving investors another reason to stay tucked up in bed.

"It's a bit pointless without an underlying cash market," said one market participant who preferred to remain anonymous. "I think it will only be offshore accounts that are trading. Gilt traders are not renowned for staying past their hours."